Paradigm shift- opportunity for professionals By Eish Taneja

Paradigm shift- opportunity for professionals By Eish Taneja [email protected] CPA (USA),C-IFRS (ACCA,UK), Green Belt (6 sigma)-USA, DISA (ICAI), Certified Valuer (ICAI), Certified Forex (ICAI)

Paradigm shift From traditional Accountants to Management Accountants We are shifting into. Corporate Valuers Insolvency Professionals GST- a new area for practice IFRS/Ind AS . Taking us into International playfield Arbitration & Conciliation experts

Opportunity Areas Companies Act,2013 Insolvency Code-2016 M&A Income Tax RBI Stock Exchanges Professional Bodies International level A new demand for Valuation professionals

Demand areas for professionals 1. Ind AS requires Fair valuations to be done for Assets / Liabilities & also Income/Expense 2. Insolvency code,2016 requires the insolvency professional to appoint 2 valuers as a part of insolvency proceedings 3. Bankers have become active and are demanding professionals of valuations for them to file cases under SARFAESI Act or other Insolvency proceddings 4. Arbitration matters involving alimony, Income Tax settlement also need valuation professionals.

Valuation Valuation is the process of determining the “Economic Worth” of an Asset or Company under certain assumptions and limiting conditions and subject to the data available on the valuation date. * Source -International Valuation Standard Council Depends upon : Purpose Mergers IPO Acquisitions / Investment Voluntary Assessment Regulatory Accounting RBI ESOP Income Tax Purchase Price Allocation SEBI Stock Exchange Companies Act Impairment / Diminution Dispute Resolution Company Law Board/ Courts Arbitration Mediation

Key Facts of Valuation PRICE IS NOT THE SAME AS VALUE The Value of a business, by whatever valuation method it is obtained, is not the selling price of the business. Value is an economic concept based on certain data & assumptions, however Price is what a Buyer is willing to pay keeping in consideration the Economic and Non Economic factors like Emotions, Perception, Greed Etc which cannot be valued as such. VALUE VARIES WITH PERSON, PURPOSE AND TIME The Value is a subjective term and can have different connotations meaning different things to different people and the result may not be the same, as the context or time changes. TRANSACTION CONCLUDES AT NEGOTIATED PRICES Though the value of a business can be objectively determined employing valuation approaches, this value is still subjective, dependent on buyer and seller expectations and subsequent negotiations and the Transaction happens at negotiated price only. VALUATION IS HYBRID OF ART & SCIENCE Valuation is more of an art and not an exact science. The Art is Professional Judgment and Science is Statistics. Mathematical certainty is neither determined nor indeed is it possible as use of professional judgment is an essential component of estimating value

Foundation to Valuation Chapter XVII Registered Valuers Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provisions of this Act, it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company.

References in Clauses in the 2013 Act for Valuation Clauses as per Companies Act 2013 Valuation Requirement/ Purpose Section 62 Valuation for Further Issue of Share Capital Section 192 Valuing Assets involved in Arrangement of Non-Cash transactions involving directors Section 230/232 Valuation under Scheme of Compromise/Arrangement or Scheme of Corporate Debt Restructuring Section 236 Valuation for Purchase of Minority Shareholding Section 260 Valuation in respect of Shares and Assets to arrive at the Reserve Price for Company Administrator Section 281 Valuing assets for submission of report by Company Liquidator Section 305 Report on Assets for declaration of solvency in case of proposal to wind up voluntarily Section 319 Valuing interest of any dissenting member under Power of Company Liquidator to accept shares etc., as consideration for sale of property of company

Salient Features of a Registered Valuer As per the 2013 Act, all valuations need to be carried out by a Registered Valuer and for valuation requirement of a company, the Registered Valuer shall be appointed by the Audit Committee or in its absence, by its Board of Directors. The Draft Rules define "Registered Valuer" and state that a person to be eligible to act as a valuer, must register with the Central Government or institution or agency notified by the Central Government by filing an application for registration as a valuer. Now IBBI is going to define the rules for valuation and also professionals . Further, the Draft Rules also prescribe that a person who shall be eligible to apply for becoming a Registered Valuer are as follows: a CA,CS or CMA who is in whole-time practice, or retired member of ICLS or any person holding equivalent Indian or foreign qualification as the MCA may recognize by an order. a merchant banker registered with the SEBI. a member of the Institute of Engineers and who is in whole-time practice. a member of the Institute of Architects and who is in whole-time practice. a person or entity possessing necessary competence and qualification as may be notified by the Central Government from time to time.

Responsibilities of a Registered Valuer as per Act and Draft Rules RESPONSIBILITIES: As per the 2013 Act, a valuer is expected to assume the following responsibilities : - must exercise due diligence and care. - must make an impartial, true and fair valuation of assets that are being valued. - must make the valuation in accordance with the prescribed rules. - is prohibited to undertake valuation of assets in which he has a direct or indirect interest or becomes interested at any time during or after the valuation of that asset. ACCOUNTABILITY A valuer violating the provisions of the requirements shall be punishable with a fine of Rs 25,000 extending up to Rs 1 lakh. A valuer, imprisoned for any offence or found guilty of misconduct shall be removed from the register of valuer and he will cease to act as a valuer. In case of intention to defraud the company or its members, imprisonment has been additionally provided as a penal provision. In case convicted as above, liable to REFUND REMUNERATION & pay DAMAGES; Also, as per the Draft Rules, a valuer in case aggrieved by an order of the Central Government can file an appeal against the order to the Tribunal.

Methods of Valuation as per the Draft Rules 1. Before adopting methods, decide Valuation Approacho Asset Approach o Income Approach o Market Approach 2. Valuer to consider following points while undertaking valuationo Nature of the Business and the History of the Enterprise from its inception o Economic outlook in general and outlook of the specific industry in particular o Book Value of the stock and the Financial condition of the business o Earning Capacity of the company o Dividend-paying capacity of the company o Goodwill or other intangible value o Sales of the stock and the Size of the block of stock to be valued o Market prices of stock of corporations engaged in the same or a similar line of business o Contingent Liabilities or substantial legal issues, within India and Abroad, impacting business o Nature of instrument proposed to be issued, and nature of transaction contemplated by parties

Methods of Valuation as per the Draft Rules 3. Registered Valuer shall make valuation of any asset in accordance with any one or more of the following methodsa) Net Asset Value Method (NAV) b) Market Price Method c) Yield Method/PECV Method d) Discounted Cash Flow Method (DCF) e) Comparable Companies Multiples Method (CCM) f) Comparable Transaction Multiples Method (CTM) g) Price of Recent Investment Method (PORI) h) Sum of parts Valuation Method (SOTP) i) Liquidation Value j) Weighted Average Method k) Any other method accepted or notified by RBI, SEBI or Income Tax Authorities l) Any other method that valuer may deem fit provided adequate justification for use of sum method (and not any of the above methods) is provided 4. Registered Valuer shall make valuation of any asset as on the Valuation date and in accordance with applicable standards, if any stipulated for this purpose. 5. Contents of Valuation report shall contain information as contained in Form 17.3

Registered Valuers (Forms)- Contents of Valuation report 1) a) b) c) Description of valuation engagement Name of the client Other intended users Purpose for valuation 2) d) e) f) g) Description of valuation engagement Nature of business or asset/liability Legal background Financial aspects Tax matters 3) h) i) j) k) l) Description of valuation engagement Analysis of past results Budgets, with underlying assumptions Availability and quality of underlying data Review of budgets for plausibility Statement of responsibility for information received

Registered Valuers (Forms)- Contents of Valuation report 4) a) b) c) d) e) f) g) 5) 6) Description of specific valuation of assets used in the business Basis or bases of value Valuation Date Description of the procedures carried out Principles used in the valuation The valuation method used and reasoning Nature, scope and quality of underlying data and The extent of estimates and assumptions together with considerations underlying them Confirmation that the valuation has been undertaken in accordance with these Rules Further it is certified that valuation has been undertaken after taking into account relevant conditions/regulations/rules/notifications, if any, issued by Central/State Governments(s) from time to time. I. The valuation report must clearly state the significant assumptions upon which the value is based. When reporting there may be instances, where there are confidential figures, these must be summarized in a separate exhibit II. In his valuation report, the registered valuer must set out a clear value or range of values along with the reasoning III. Incase the valuer has been involved in valuing any part of the subject matter of valuation in the past, the past valuation report(s) should be attached and referred to herein. In case a different basis has been adopted for valuation (than adopted in the past), the valuer should justify the reason for such differences.

Sample Report & Excel sheet working sample report valuation sample sheet company specific report